As a former Executive Director of the World Bank I know that the columnists of the Financial Times have more voice than what I ever had, and therefore they might need some checks-and-balances.
Currently, having probably trampled some delicate ego, I am a persona non grata at FT.
Would the child shouting out “the Emperor is naked” have his observation published in FT? Would the child now need a PhD for that?

That presents a perfect opportunity to explain again, for the umpteenth time, what regulators did wrong with their risk weighted capital requirements for banks.

They would have assigned a higher risk weight to the Republican plan, because even though it might kill less it is perceived (or decreed) as riskier, than what they would assign to what though more dangerous for society, obesity, is perceived as safer.

If Venezuelan oil revenues had been shared out equally to all Venezuelans, the current Venezuela tragedy would not be happening. It is as easy as that. To centralize those revenues in the hand of the government is an invitation to, sooner or later, have these to be managed by well-intentioned fools, outright bandits, or a poisonous combination of both, like now.

One sole change in the article 12 of Venezuela’s constitution, in order to declare the Venezuelan citizens to be the owners of all oil reserves, instead of the government, would be one of the biggest game changers ever.

In such a case could Venezuela’s creditors go after the oil belonging to about 32 million Venezuelans and not one government? How would a judge decide if he knew that creditors were trying to go after each Venezuelan’s US$30-40 per month, that which could help stop millions of human beings from starving or dying from the lack of medicine?

Sir, Rana Foroohar writes: “College students who manage to graduate do so with the highest average levels of debt in the country, since state funding has been so dramatically cut over the past several years. Meanwhile, roughly half of the population has only a high-school degree, which guarantees them a $15-an-hour future.” “New Hampshire: a tale of two Americas” July 29., strangely in that FT’s Weekend Magazine I do not receive as a subscriber in Maryland, USA.

That begs two sets of questions: First, is not ample availability of student debt a much larger driver of high student debt than lack of state funding? Would university fees be nearly as high if these were not so easily financeable? Is not student debt a business driven more by financial profiteers than by pure educational considerations? If students already find it hard to repay their debt, is it logical for taxpayers to foot that same bill? In short should not higher education be reorganized more in terms of being joint ventures between students and universities?

Second, in these times of robots and automation, how on earth can Foroohar presuppose having more than a high school degree would guarantee the young a more than $15-an-hour future? And if she supports the idea of a $15 an hour minimum wage, what does she suggest to do with all those who with or without high school degree cannot reach up to that bar.

Sir, much of this easy talk of solving coming problems the usual statist way by raising taxes and having bureaucrats have a go at it, only risks to complicate matters much more. As a Venezuelan I know that to prevent social order from breaking down is always better than trying to reconstruct it. We are facing a new world, we now already need decent and worthy unemployments. A universal basic income, funded with real money, which provides a step stool to reach up to the gig economy, seems like the only real, peaceful tool at hands… though of course the redistribution profiteers hate it as it diminishes the value of their franchise.

Foroohar also writes: “My husband… employs cleaners, plumbers and tradesmen, some of whose parents worked in the same jobs for his mother. It’s hard not to think of this as a kind of neo-serfdom, given the lack of other options for those without a college degree.”

Well I am sure that there will come a day, quite soon, when many with a college degree will deeply envy the income of plumbers, especially if these are serving the one percenters.

PS. This article strangely appears only in that FT’s Weekend Magazine I do not receive as a subscriber in Maryland, USA.

@PerKurowski

July 27, 2017

Sir, Thomas Hale while explaining the appetite for Canadian covered bonds quotes Michael Spies, a strategist at Citi with: “I’m buying a collateralised bank bond rated triple A, from a bank which is rated double A, in a country which is rated triple A,” he adds. “Now let’s put this together and compare it to an Italian covered bond.” “Canada’s housing rally owes a debt to Europe” July 12

That is not the whole story. Those Canadian covered bonds can, as a consequence of the risk weighted capital requirements, be held by banks against less capital than those “risky” Italian ones; and so therefore the banks can multiply their equity with more Canadian net risk margins than with Italian; and so banks will earn higher expected risk adjusted returns on equity with the Canadian than with the Italian; and so the Canadian covered bonds, when compared to the Italian, will have more demand than these would have had in the absence of the risk-weighting, and the Italian less.

That the distortion in the allocation of bank credit to the real economy the risk-weighted capital requirements for banks cause is not more discussed, is one of the great mysteries of our times.

PS. I was kindly informed of that "The risk weighting for a highly rated Italian covered bond is actually significantly lower (10%) than for a Canadian covered bond of the same rating (20%). This is because the European legislation (CRR) affords preferential treatment to issuers in the European Economic Area." I did not know that, but it sure makes me question whether Canada is aware of that it is subjected to this kind of European regulatory protectionism.

The regulators, with Basel II of 2004, allowed banks to leverage 62.5 times if a AAA to AA rating was present… while for instance only 12.5 times if there was no credit rating. That temptation set up the banks to, sooner or later fall into a trap. Are these regulators innocent?

In the same vein carbon emission controllers set up procedures that evidently could easily be cheated on. Are these controllers also entirely innocent?

I ask these questions because from what we have seen neither regulators nor controllers have been demoted, on the contrary, at least with respect to banks many, like Mario Draghi and Stefan Ingves, have been promoted.

Had the credit-rated-risk-weighted capital requirements for banks that distort the allocation of credit to the real economy not been introduced, the 2007/08 crisis and the ensuing slow growth would not have happened.

If a country decides to impose a 1.000% tax on liquor, does it not have any responsibility in that its citizens (including its legislators and tax collectors) start smuggling liquor?

As a Venezuelan I can only agree with most of it but, unfortunately, in October of 1829, Bolivar ordered the continuance of what had been decreed in 1783 by Carlos III of Spain, namely that all precious metals and “juices of the earth” reserves belonged to the Republic.

With that Bolivar guaranteed the Venezuelan governments would not depend exclusively on the citizens and that, sooner or later, some would capture the government to steal it blind.

If we Venezuelans are to gain real independence all our net oil revenues have to be shared out entirely to the citizens.

Had that been achieved earlier, the current disaster would not have had a chance to happen.

It is a great tragedy that freeing Venezuela from the curse of centralized oil revenues is still not on the agenda of anyone the most important opposition leaders.

@PerKurowski

July 23, 2017

Sir, Kate Allen writes: “a host of other financial products have begun to emerge, promising to tackle social issues including homelessness, access to education, clean water, crime prevention and helping disadvantaged children…. The market is still small — just $3.5bn of social bonds were issued in the second quarter of 2017” “Ethical investing branches out from green roots” July 18.

And small it might really be when comparing to all of the antisocial financing that goes around. As an example just in that quarter the Maduro government of Venezuela, that one who is publicly and notoriously violating human rights and has its people starving and dying because of lack of food and medicines, sold $2.8bn in bonds. These antisocial bonds were initially picked up for a mere $800 million by a “with those possible returns, why should we give a shit about ethics”' Goldman Sachs.

Allen points out the fact that “The [social] bonds must perform socially as well as financially.” Yes, and if they don’t perform socially, as is clearly the case with Venezuela, then they should not perform well financially either. The Western civilization has an obligation to put a stop to odious anti-social financing. Otherwise our heirs will end up having to refer to that civilization as a once was.

Hopefully we will see an important socialite publicly disinviting a seemingly totally unrepentent Lloyd Blankfein from an important social event, because of Venezuela.

PS. I wonder how much $ in bonuses Blankfein will receive from this operation.

@PerKurowski

July 22, 2017

Sir, Gillian Tett, your US Managing Editor, referring to the responses to an article by her titled “Why a divided America has united against the media”, July 14, strangely published only in that FT Weekend Magazine I do not receive here in Washington D.C. writes: “Readers and viewers say they want the media to be “less biased” and to “focus on the facts” but the problem of how to finance and organise serious non-partisan journalism for the mass market remains largely unsolved. The trouble is that partisan social media is free – and readers seem to be hungry for this. So how can we support real news when most voters keep flocking to entertaining stories that are (at best) partisan and (at worst) deliberately fake?” “Want to change the media? Don’t get mad – get even”, also solely in FT Weekend Magazine, July 22.

The following is a very brief version of my relation with FT, as an opinionated subscriber.

FT and its columnists, with relation to banks’ crisis and regulations, have consistently written about deregulation and excessive risk-taking.

I on the other hand and in that respect, have with over 2.500 letters to FT consistently written to FT about misregulation and excessive risk-aversion; which results in dangerous excessive exposures against too little capital to what is ex ante perceived as safe, like sovereigns, the AAArisktocracy and residential housing, but could ex-post be very risky; and too little exposures to what is ex ante perceived as risky, like SMEs and entrepreneurs.

As one of the frontlines on this issue of the risk-weighted capital requirements for banks we find that in Basel II regulators assigned a risk-weight of only 20% to what is rated AAA to AA, and that which therefore could be very dangerous, and 150% to what is rated below BB- and that by just that fact alone is ex-ante made so innocuous to the banking system.

In one sentence, regulators regulate the banks based on the ex ante perceived risk of the banks assets, and not based on the risk ex post of the assets for the banking system.

But for soon a decade, my arguments have been met with absolute silence, because as one of you informed me, I was just obsessed with the issue. Sir, I am reporting on a regulatory bomb that is destroying the future economy for our grandchildren, and you really don’t want me to be obsessed?

Now Tett, one of the frequent recipients of my comments writes: “the next time you complain about the media, ask yourself how you expect “fair” mass-market journalism to be funded and run – and if you are willing to pay for it. That question doesn’t let journalists off the hook: we writers need to dignify our craft. But building a better media is a task that involves journalists and non-journalists alike. Being angry is not enough; we need solutions.”

Sir, it is quite worrisome to read “Without fear and without favour” FT’s Tett confessing to “commercial pressures that are increasingly encouraging private sector media outlets to be more partisan”. Have you informed your shareholders about this? I would see it the other way, the more fakes and partisanship there is in the media, the more valuable do bastions of truth and diversity become. Or not?

Shaming out fakes and partisans must also be part of societies responsibility. For instance I have started to look for a collaborator to write a book tentatively titled “Me, Subprime Banking Regulations and FT”

@PerKurowski

July 20, 2017

Sir, with interest I have read Martin Wolf’s “How the developed world lost its edge” July 20. In my opinion Wolf ignores two major events that had these not happened would have radically changed the current outlook.

First, regulators told banks: “Go out in the market and negotiate the best risk-adjusted net margins you can. And then, in order to make sure you do not take risks, we will allow you to multiply these margins much more in the case of assets perceived as safe than in the case of risky assets.”

That of course led to the accumulation of excessive exposures and against very little capital (equity), to something ex ante perceived decreed of concocted as safe, like AAA rated securities and sovereigns, which when ex-post turning out very risky caused the 2008-crisis.

And then central banks, with their QEs and ultralow interest rates, hindered the necessary market cleanup, and kicked the 2008-crisis can down the road, a road made unproductive by previous mentioned regulatory risk aversion.

So what resulted? No adjustment and further indebtedness, which allowed prices of assets to increase and demand (among other of Chinese production) to be sustained… further allowing the Chinese to save.

Wolf writes: “The rapid growth of both trade and cross-border financial assets and liabilities and trade, relative to global output, has come to a halt. In the case of finance, plausible explanations are risk-aversion and re-regulation”. “Risk-aversion”? Yes, but not any new one but that which result from regulators loading up, on top of bankers’ natural risk aversion, there own aversion based on the same perceived risks. The bankers lend you the umbrella when the sun shine’s Mark Twain, would never have believed his eyes had he seen such regulatory nonsense.

Sir, as I’ve written to you many times before, never ever has a generation taken on so much debt to finance their own consumption, and shown so little respect for the needs of future generations, those needs that include bankers lending to risky SMEs and entrepreneurs.

How can a Western world made great by taking risks, not lose its edge by avoiding it?

Wolf concludes with: “Rising populist pressure across the high-income economies makes managing these shifts far more difficult.” Indeed, but let us not forget that this mess began when some truly inept populist technocrats, like real life Chauncey Gardiners, convinced governments they knew what they we doing.

PS. Martin Wolf also fell for it.

@PerKurowski

July 19, 2017

Sir, Henry Sanderson reports on a report of World Bank that states: “Technologies needed to meet the Paris climate agreement from wind, solar and electricity systems are “more material-intensive” than current fossil-fuel supply systems, a report by the bank says.

This makes of Trump’s refusal to play along with the Paris Agreement, a truly minor event. That the reports comes up only now, further evidences how green-business’ interests is skewing the whole debate. I have for years held that if our fight for saving the environment is planned or commandeered by profiteers, we are toast.

If the world adopts a revenue neutral carbon tax the resulting price signals will not only reduce the demand for carbon containing energies but will also allow for a more efficient allocation of resources.

Sir, Eswar Prasad, a professor at Cornell University and senior fellow at the Brookings Institution, writes: “Fixing the financial system is not just about managing risks and avoiding disaster, but also about allocating capital to the more productive, dynamic and employment-generating parts of the economy.”, “How to fix China’s unstable financial system” July 19.

How do you do that, not only in China but everywhere, with bank regulators who do not care one iota about the efficient allocation of credit to the real economy, but only about banks avoiding what is perceived as risky?

Especially since 2004’s Basel II, banks have been allowed to multiply their capital with many times more the net risk-adjusted margins when investing in something “safe”, like the past and the present, like sovereigns, the AAArisktocracy and residential houses, than when investing in something “riskier”, like the future, like SMEs and entrepreneurs.

That has completely distorted credit allocation and for no particularly good reason, since there is never ever major bank crisis that result from excessive exposures to something ex ante perceived as risky when placed on banks’ balance sheets.

Sir, Kiran Stacey and Anna Nicolaou report on “Emerging nations in South Asia and beyond are pinning their development hopes on creating millions of low-paid manufacturing jobs over the next decade. Advances in automation threaten to derail the plan.”, “Stitched up by robots”, July 18.

And Rajiv Kumar an economist and founder of the Pahle India Foundation says: “Robotics and artificial intelligence are the next revolution. They are going to be more disruptive than any of the revolutions we have seen in the past — steam, electricity, the assembly line or computers — because they are going to replace not just routine but complex mental functions. The fear is that our so-called demographic dividend could become a demographic nightmare.”

Absolutely! In 2003 I already wrote about the possible need for sitting around in a great human circle, scratching each other backs, and paying good money for the service

Currently there are too much resources wasted, dedicated to trying to generate employments, and too little trying to make unemployment socially livable. Why? Might it be because the employed have more resources with which to pay their defenders?

We must do something, perhaps like a universal basic income, before social order breaks down. Reconstructing social order is so much harder. I as a Venezuelan should know.

@PerKurowski

July 16, 2017

Why do I argue the possibility indicated in the title? Because perhaps robots could have been able to help their students to shake off sentimentalities and primal emotions a bit more, and taught for instance our regulators that what is risky for banks, is not what they also intuitively could feel to be risky to our banks, but quite the opposite.

What is fervently believed safe, like something with an AAA rating, is what can cause banks to generate excessive and dangerous exposures; on the contrary, what is believed risky, as something rated below BB-, is what bankers won’t touch with a ten feet pole.

But what did the regulators educated by humans do? In Basel II they assigned a risk weight of 20% to what is AAA rated, and one of 150% to the below BB- rated.

And so we would not ended up with a 2007-08 crisis caused by an excessive exposure to AAA rated bonds and sovereigns like Greece; and we would not be suffering a slow response to all QE and low interest stimuli, caused by the lack of loans to “risky” SMEs and entrepreneurs.

Well so do I! When I read so many opinions in FT stating categorically that Britain EU has much more to lose from Brexit than EU without acknowledging EU’s huge and delicate Brexit problems; when I see no one trying to capture the support of Britain that undoubtedly exists among Europeans; when I see no one wanting to go out and ask what kind of punishment they want the not so popular, the not elected by vote executioner Barnier to enforce on Britain, I do feel that most of you have an existential necessity of the Brexit affair turning out real bad for your country… or a shameful lack of willingness to defend what is yours, meaning not only Britain but also Britain’s future relation with Europe.

Can you imagine Britain during World War II communicating solely with the Vichy government of France and not reaching to La Résistance?

The Brexit morning after do you think Europeans want to see Britain gone for good? I doubt that, Britain is much more part of the glue that holds EU together than you seem to want to know.

July 15, 2017

Sir, You write: “With or without a price crash, [resulting from interest rates rising] thinking about real estate must change… A house is not, after all, a productive asset. It is a shelter.”, “When property becomes a roof and a floor again”, July 15.

With Basel II regulators allowed banks, when financing residential houses, to multiply their capital with 35.7 times the net risk adjusted margin, in order to obtain their return on equity. When lending to an unrated SME or entrepreneur, those who could help create new jobs, banks were only allowed to multiply that same margin 12.5 times.

The only reason for that senseless distortion was and is that regulators, as did and do the banks, considered financing houses something much safer than financing some risky enterprises.

Sir, compared to the case in which such regulatory differences did not exist, what gets much more credit than it should, and what much less? Or are you among those naïve enough to believe bankers have a responsibility, for the good of society, to overlook such skewed incentive structure?

Extrapolates that, and the logical result is the future, we would all end up sitting in ample homey shelters, but with no jobs to be able to pay mortgages, utilities or food.

Sir, such is the short-termism of regulators you have cared nothing about to understand and denounce. On the contrary, you have dedicated yourself to silence my warnings.

PS. By the way if an AAA rating was present, like in the AAA rated securities backed with mortgages to the subprime sector, banks could multiply that margin by 62.5.

PS. Where do you think fiscal sustainability is heading if house prices crash and much property tax revenues vanishes?

“Michel Barnier, the EU’s negotiator, patiently explains, as if to inattentive children, that ‘the clock is ticking’.” Does Wolf really think that Michel Barnier has been authorized by EU, and especially by the Europeans, to impatiently allow the clock on Brexit negotiations run out? If Barnier does that, on his own, to show off his toughness, they will run him out.

“Brexiters fail to understand the weakness of the UK’s hand” “Does that mean that EU understands their hand to be strong?

“Damage to access to the EU market would, for example, be far worse for the UK than vice versa, because the EU’s economy is some five times bigger than Britain’s.” What? I can’t believe Wolf says this. Whatever damage might in fact result, has very little to do with the size of the economy. A larger economy, on a per capita basis, could be just as sensitive.

“The EU is a creature of law. Members would view a [no deal] violation of UK obligations as heinous.” What members, the not so popular EU technocrats?

“The UK government is stuck between a rock and a hard place.” Does Wolf really think the governments in EU are feeling comfortable? They have their own need of votes.

“Another referendum would be dynamite, further aggravating the deep splits over the European issue” Does that not depend partly on the results of the referendum?

“Whom the Gods wish to destroy they first make mad. So it now is over Brexit”

There I agree. Because I wonder why Martin Wolf, and most other influential Brexiteers and Remainers, British foremost, supposedly, are not out there marketing the need for a very amicable Brexit, among all those Europeans that might wish the same, and who also the last thing they need, is for additional complications in their already hard as it is life.

PS. Did you not see how Trump and Macron got along well even with Trump’s Paris agreement exit?

Per Kurowski

I am besides a Venezuelan, also a Polish, and therefore a European citizen.

Sir, John Paul Rathbone writes: “As protests and violence engulf Caracas, the country is beset by shortages and endemic corruption. Amid the chaos, Mauro Libi has built a huge food business empire but his critics want to know how.” “Profits from empty shelves” FT, Big Read, Venezuela, July 14.

His critics want to know how? In a country in which a government centralizes 97% of all export revenues, and foreign currency is thereafter allotted not by free market operations but by mechanisms that require the approval of individual government bureaucrats, can there be any doubt that the fortune Libi derives from imports of food to Venezuela, as described by Rathbone, can be anything but the result of corruption?

FT, I am sure you would not dare try to justify any other possibility, and this even if the only consequence you could suffer from it was being laughed at?

Rathbone writes: “Mr Libi’s story, as he tells it, is of a resourceful businessman working against the odds… He even claims to be exporting oatmeal to the US”

Those readers of papers like FT, who can read statements like that, and do not feel like vomiting, prove themselves to be intellectual and immoral accomplices of the death of the many Venezuelans who are suffering from lack of foods and medicines.

Western civilization world, if something like Venezuela happened in your country, would you like the world to behave as indifferent as you do?

Western civilization, “We did not know” might have worked previously, but is nowadays a completely unacceptable excuse.

@PerKurowski

July 12, 2017

Sir, you agree with the “Taylor report” that in order to pay Uber drivers the statutory minimum wage entitlements, these should be paid with “adjusted piece-rates such that an employee working averagely hard earns at or above the minimum wage level”, “A judicious adjustment to the gig economy” July 12.

Really? Is that an incentive for an Uber driver to work more or less than average?

What will, what must happen, is that a lot of not really interested in earning a lot drivers will be asked by some out-of-workers-to-represent unionist, to sign up to Uber by those who want to earn more, so as to get those work averages down.

If any Uber driver works, and is not satisfied with his earnings, then he can always go and work someplace else for a minimum wage.

Sir, why do you agree with artificially raising the bar for people to reach up to the gig-economy? Is it not better to instead of raising minimum wages to start thinking about implementing a universal basic income that could function as a convenient step stool to help people reach up to the gig-economy?

When are you to wake up to the fact that as much as we need to think about the rights of the employed, we must think of the rights of the unemployed to at least work somehow?

Absolutely! And so it is immoral to promote risk aversion when knowing, as we should know, that risk-taking is the oxygen of development. If I were Trump the following would be my speech with relation to Western civilization:

“The fundamental question of our time is whether the west has the will to survive. Do we have the confidence in our values to defend them at any cost?” Do we have the willpower to stop regulators who tell our banks not to finance our young’s future, as that’s too risky, and instead earn their returns on equity by refinancing their parents’ past and present as that’s safer? Where did we lose that which made us sang in our churches “God make us willing”? And when did we give up on the citizen, risk weighting them 100%, so as to place all our trusts in governments, risk weighing our sovereigns 0%?”

Sir, Martin Wolf once told me I had an obsession against the risk weighted bank capital requirements of the Basel Committee. I confess. I do. But he himself now displays having fallen victim to that obsession a la mode that is to be against Donald Trump, as if getting rid of Trump would normalize our world.

It is so much an obsession that he like many argues that Trump’s abandonment of the wishy-washy, photo-ops, green profiteering lobbied Paris agreements, will de facto be what causes the extinction of our planet, as we know it. Its crazy!

Wolf explains “plutopopulism”, the possible source of a “clash of civilisations”, as the natural consequence of high inequality. There I agree! But the recent high inequality that is registered, for instance in the USA, is the direct consequence of QEs and alike kicking the crisis can down the road, while maintaining regulatory distortions that favor the Sovereign, the AAA-risktocracy and the ownership of houses. And on that Wolf keeps mum!

And clashes of civilization, worse than global, domestic ones, will be the result if we do not prepare in time to hinder that breakdown of social cohesion that will result from a growing structural unemployment. Sir, we need, urgently, worthy and decent unemployments. How? A Universal Basic Income seems to be a logical start.

At the end of last decade I shared much the concerns of Martin Wolf, seemingly not any longer. Why? When Wolf writes: “the west contains far too small a proportion of humanity to lay any moral claim to global management”, I am saddened. Our morality is not to be dictated by majorities.

I am born in Venezuela, educated in Sweden, worked in Venezuela, live in Washington and have Canadian grandchildren. I feel globalized and sure I cannot be defined either as a reactionary or as a chauvinist by my way or life. But, to hold as Wolf does, that “Terrorism is just a nuisance” that “could poison relations with 1.6bn Muslims worldwide”, makes it absolutely clear to me that, for better or for worse, I will never be as globalized as Martin Wolf. When and why did he so completely jump off the Western Judean-Christian civilization?

Yes, “Nazism was an existential threat”, within the Western Judean-Christian civilization. Thank God it was defeated, with the Western Judean-Christian civilization’s forces and convictions.

Jenkins just does not get it. “The outsized revenues and profits that banks and other financial groups made in the run-up to the crash” were the direct result of regulators allowing banks to leverage their balance sheets tremendously. For instance Basel II of 2004 authorized banks to leverage 62.5 times to 1 if an AAA rating was present, and a lot of times more when lending to a “safe” sovereign. Had banks been allowed to leverage with all assets only 12.5 times, as Basel’s 8% basic capital requirement implied, there would not have been outsized bank revenues and profits, nor the crash. Capisci?

How could banks become an engine of productivity again? Stop discriminating against the “riskier” future and in favor of the “safer” present.

Sir, Sarah O’Connor while discussing the issue of jobs, for humans or robots, sensibly concludes that it is not “the routine jobs” taken over by robots that should bother us but “the basic stuff — homes, security, prospects — that we lost along the way” “The middle class is not shrinking as much as it thinks” July 11.

O’Connor brings up an interview from a 1974 book “Working” written by social historian Studs Terkel. In it a steelworker says: “I want my kid to be an effete snob . . . If you can’t improve yourself, you improve your posterity. Otherwise life isn’t worth nothing.”

I sure agree with this steelworker’s general concept, but, if my grandchildren must turn into effete snobs, I hope it is not because they have been replaced by some low or middle class robots, but by the 1% absolutely best ones… or the smartest ever artificial intelligence.

Sir, it should be clear that the better the robots that work for us the more they could produce for us. The marginal contribution of robots that substitutes for bank tellers must surely be less than that of robots that substitutes for bank CEOs.

Just as an example, let us suppose current bank regulations had been carried out not by Basel Committee technocrats, but by some smart artificial intelligence. Then the 2008 crisis and the ensuing slow growth would never have happened. Mr. AI would of course first have looked at what causes major bank crisis and so determine that excessive exposures to something ex ante perceived as risky, never ever did. He would also have understood that allowing banks to multiply with different leverages the net risk adjusted margins, would completely distort the allocation of bank credit to the real economy.

So what can we do? I would say first to make sure to keep the competitive pressure up on robot manufacturers. If we increase minimum wages for humans and do not begin taxing what the robots produce, we will not get the best robots we want.

An updated Chinese curse would be: “I wish your grandchildren live attended by 3rd class robots and dumb artificial intelligence.” And Sir, I would hate for that to happen to my grandchildren, because of something that I did or did not do.

Of course then we would come to the very delicate issue of how do we redistribute robot and automation productivity to humans. That is going to be awfully contentious. The only thing that occurs to me, before social cohesion breaks down, is to being by trying out a universal basic income.

July 10, 2017

That is the task of most sovereigns in the world. If you start adding up what tax exemptions’, Basel’s 0% risk weights, and the purchase of sovereign debt through QEs’ really means in terms of subsidizing government borrowing, there is no doubt we are heading for all sovereigns having to, sooner or later, to detox from excessive debt. As the addiction to plenty and cheap debt is very much addictive to governments, I assure you the withdrawal symptoms will be horrendous. But, if they don’t withdraw from this addiction all be so much worse.

A world that in this way de-facto presupposes government bureaucrats can use bank credit for which they are not personally responsible better than the private sector is a world destined to failure.

What do current banks regulations mean? That banks can multiply many times more any net risk adjusted margin when lending to a sovereign than when lending to the private sector… and almost no one seems to find nothing wrong with that.

As the access to plentiful and cheap borrowings is very much addictive to governments, I assure you that the withdrawal symptoms will be horrendous. But, if they don’t withdraw from it we all will be so much worse.

Sir, your silence on this regulatory failure is mindboggling. Or you are statist beyond help, or dumb, or you just don’t have it in you to recognize a mistake.

Of course, if you are to follow the recommendations of someone, it is usually a very good thing to know how he (it) thinks.

But that is also relevant to humans. For instance I would love to understand why, if there has never even been a major bank crisis that has resulted from excessive exposures to something perceived as risky when placed on banks’ balance sheets, regulators came up with their risk weighted capital requirements for banks… more perceived risk more capital, less perceived risk less capital.

That causes banks to build up large exposures against little capital to what is perceived decreed or concocted as safe, like AAA rated securities and sovereigns like Greece; and to stay away almost entirely from “the risky”, like SMEs and entrepreneurs.

I suspect it was because first they never gathered empirical data about previous banks crisis that made a relevant distinction between the ex-ante and the ex-post perceptions of risk.

And then because they might have only cared about avoiding the crisis and not one iota about how banks perform the allocation of bank credit between the crisis.

I have asked regulators over and over again about this but have not yet been able to extract even a crooked answer, much less a straight one… they just keep mum on it.

Perhaps Darpa could do us the favor to ask their intelligent machines, to explain to us, or at least to me, in simple terms, how human bank regulators think.

For instance why did they with their Basel II allow banks to leverage their capital over 62 times if AAA ratings were present, and only about 8 times with what was below BB- rated? Should they not have known that bankers love what’s “safe” and do not want to touch even with a ten feet pole something as risky as a below BB-?

July 08, 2017

Sir, Tim Harford writes: “young men in particular — are completely disengaged from the labour market. (They don’t count as unemployed because they’re not looking for work.) In 2016 — excluding full-time students — 15 per cent of men in their twenties did not work a single week in the entire year…why are so many young men not even looking? One explanation is that they would rather be playing a game” “Fantasy gaming beats having a job”, July 8.

Harford finds this to be an alarming trend: “If basement-dwelling videogamers are turning their backs on reality, they are missing a vital opportunity to pick up the skills, experience and contacts they will need if they’re ever to earn a proper living. The long-term prognosis is worrying.”

I am not so sure. It looks like the world, because of robots and automation, (and lousy risk adverse bank regulations) could soon face severe structural unemployment, in which case what to do with those unemployed, in order for social cohesion not to break down, becomes a major challenge.

Not long ago I remember reading about a city that, in order to keep large groups of youths from littering and causing a general disorder, was exploring plans to install speakers in the main square to play "nice, easy listening" music to calm behavior. I believe some Barry Manilow songs were to be on the repertoire.

I’ve no idea if that plan was put into effect, or if so of its results, but there is no doubt in my mind that keeping the youth busy with interesting games sounds like a more effective strategy.

Of course we should hope for those games to inspire good citizenship. Who knows, down the line there might be a Nobel Prize of Peace awaiting some specially deserving game designer.

And even if “Food is cheap; living with your parents is cheap; computer games are cheap” some type of Universal Basic Income must be present, in order to be able to at least half-bake a solution. If not young men could soon be telling their parents “Mom, Dad, you move down to the basement, now its my turn to live upstairs!”

But what are we to do with “Women — who spend less time playing games”? Will embroidery still do?

July 07, 2017

Sir, I refer to Alex Barker’s report on “a tough speech on future relations” in which Michel Barnier opined that “the consequences of leaving the union had not been “fully understood across the Channel” and that Britain has yet to “face the facts” on the negative consequences of Brexit “EU top negotiator warns Britain to ‘face the facts’ on Brexit” July 7.

And I ask the question posed in the title because, for instance when in 2013 acting as the European Union Commissioner for Internal Market and Services, and wanting to impose his bank regulatory wills on the US, I perceived him like wanting to play a tough guy, “barnstorming the U.S.”, and this can have unexpected and unwelcomed consequences for both sides of the Channel.

What would Barnier do if on a scale of 1 to ten, from gentle to firm, the Europeans voted to treat Britain with a 2? Would he be capable to deliver?

Sir, again, I also detect a clear masochistic strain in all those Remainers who seem to want Britain to be severely mistreated, just in order to tell the Brexiters “See, we told you so!”

Britain, you should not sell yourself short. You have many many friends over the channel and who want to remain close friends.

Not so Ms. Tett! I do not if he really said it but Mark Twain has been attributed opining that bankers lend you the umbrella when the sun shines and want it back as soon as it looks it could rain.

And never ever has there been a bank crisis caused by excessive exposures to something perceived as risky when placed on banks’ balance sheets.

But that did not stop scared lack of testosterone bank nannies to also require banks to hold more equity when lending to the risky than when lending to the “safe”.

So what happened? As banks earned much higher risk adjusted returns on the safe they could not resist the AAA rated securities backed with mortgages to the subprime sector, or sovereigns like Greece. And so a typical bank crisis, that of excessive exposures to what was ex-ante perceived as safe but that ex post turned out very risky ensued. In this case made specifically worse, by means of the lower equity banks had been authorized to maintain. For example in the case of the AAA rated securities Basel II, because of the standardized risk weights, banks were required to only hold 1.6% in capital, meaning an authorized leverage of 62.5 to 1.

And since banks now find it harder to earn higher risk adjusted ROEs on more capital, they have abandoned lending to risky SMEs and entrepreneurs, those who open up roads on the margins of the economy, and so of course slower economic growth results.

The lack of testosterone is not a fundamental value of the Western civilization. On the contrary in churches we sometimes sang, or at least used to sing, “God make us daring!”

@PerKurowski

July 06, 2017

Claire Jones writes on Alexandru saying: “Out of every 10 of my friends, only one works. It’s not a good situation for my generation,” Alex says. He and many of his friends still live at home with their parents. “When I talk to them about the past it sounds better. They all had a job and the opportunity to have a family.” “Temporary fortunes” July 6.

And Ms Bellieni “lives with her young child and husband, who also does many temporary jobs, in a property that belongs to his parents. “Otherwise we couldn’t make it”

Banks are allowed to hold much less capital when financing houses than when financing SMEs and entrepreneurs, as regulators think the former is much safer for the bank than the latter. As a result banks can earn much higher risk adjusted returns on their equity financing houses than financing “the risky”.

But since SMEs and entrepreneurs are job creators par excellence, could these regulations create an excess of basements in which the unemployed or underemployed young can live with their parents, and a substantial lack of jobs?

Mario Draghi, the Chair of the Financial Stability Board and his ECB officials clearly do not see this as a problem, hey they might not even see it as a distortion. That could be since like overly worried nannies they are totally focused on avoiding bank crises, and do not care one iota about how banks do their job in the in-betweens.

Sir, the younger generations, squeezed by this anti Western civilization value of risk aversion, and an increased loss of jobs to robots and automation, could at some point become sufficiently enraged so as to say… “Mom and dad, you move down to the basement, it is our turn to live upstairs!”

Of course, with regulations that distort the allocation of bank credit to the real economy, any recovery is on shaky grounds.

To help Mme Christine Lagarde of the International Monetary Fund understand the issue, better, I have drafted a short and polite letter she could send to her friends the regulators in the Basel Committee and the Financial Stability Board. Their answer, or their no answer, should reveal a lot.

Dear regulator.

You set your risk-weighted capital requirements based on the ex ante perceived risks already considered by bankers when determining the size of the exposure and the risk premiums to charge. Could that not imply that perhaps the ex-ante perceived risks are excessively considered?

I often wonder if it would not be wiser of you and your colleagues to set these based on those risk not having been adequately perceived, or that bankers are not capable of manage the risks they perceive; or with an eye to somewhat unlikely but nevertheless potentially catastrophic events.

You and I know that one vital function we expect our banks to perform is to allocate credit efficiently to the real economy. Remembering that context, I wonder if the risk weighting you and your colleagues customarily make in your regulatory function is perniciously, if also unintentionally, distorting capital allocation -- by favoring the safer? past over the riskier? future?

Sincerely,

PS. If they do not answer Mme Lagarde could find a summary of some of the mistakes with risk weighting here.

I would heartily agree, if only all that easy money was flowing more towards investments in the future. It is not! The current risk weighted capital requirements give great incentives for that not to happen.

And when Wolf opines “the core western financial system is far better regulated and capitalised than it was in 2007”, how on earth does he know that?

Sir, the world urgently needs bank regulators who are not solely fixated on avoiding crisis but who also understand the vital importance of good banking between the crises.

As is, the time bankers should allocate to ask that all-important question of “What do you intend to do with the money if we lend it to you?”, will be taken up more and more with trying to understand and fill out regulatory material.

And what has easy money done to equity markets? Corporations engaged in short termism have taken on debt in order to pay out dividends and repurchase shares. Is that something good?

Wolf writes: “The BIS talks, sensibly, of building resilience. A part of this lies in ensuring that growth becomes less dependent on debt.” Yet by treating it only as one task of many, Wolf sort of diminishes its relative importance. Debt finances much anticipation of demand, when that debt hits the wall of having to be repaid, future demand will fall.

Sir, as I see it, never ever has a generation used up so much public and private borrowing capacity for its own short-term benefits. Social security and pension plans, sold by governments on the basis of an expected 7% real return, are by the minute taking on more characteristics of Ponzi schemes, using fresh money from future retirees to pay out benefits of the current.

July 04, 2017

Sir, Philip Stafford reports “Reforms put in place by the Group of 20 leading nations have successfully tackled the most pressing issues that contributed to the crisis, according to the annual report from the Financial Stability Board, an international group of policymakers and regulators.” “Financial reforms: Shadow banking tamed, argues global watchdog” July 4.

Nonsense! If all evidences are duly reviewed, what most caused the crisis was the risk weighted capital requirements for banks. These allowed banks to leverage immensely, and thereby earn very high expected risk adjusted returns on their equity, with what was perceived, decreed or concocted as safe, like financing houses, sovereigns like Greece or the AAA rated securities backed with mortgages to the subprime sector.

The regulators regulated as if they were bankers. As regulators they should look at the risk that the risks are not adequately perceived or managed, and at the possibility of unexpected events.

And that stupid risk weighting has not been eliminated because of the introduction of a non-risk based leverage ratio; on the contrary as that LR pushes up the capital floor, it might squeeze even more those affected by the roof set by the risk-weighted portion.

And regulators have also introduced additional sources of distortions like the liquidity requirements, which also are based on simplifications about what is liquid and what not.

Their test of the stresses a la mode, or the elaboration of wills that might affect the living, could also signify new sources of systemic risks.

No the regulators have done a lousy job, primarily because they all circled their wagons around the mistakes they committed.

And if they go on doing what their mutual admiration club’s groupthink tells them to do, let’s hope the shadow banking sector goes underground, so that regulators don’t get their dirty nannying fingers around it too.

Me and my constituency!

Me and my constituency!

FT, just so that you know:

Some very few regulators thinking they were capable of managing the bank risks of the world, caused and are still causing immense sufferings, and you Sir are refusing to help holding them accountable for that.

My wicked question to FT

When do banks most need capital, when the risky turn out risky, or when the "not-risky" turn out risky? --- Yep, I think so too!

Videos: The Financial Crisis

My credentials

I have more credentials than most to speak out on the financial crisis and the subprime financial regulations having spoken out loudly about that since 1997...which could be embarrassing to “experts” with weak egos.

Most of those who think of themselves so broadminded when asking for “out of the box thinking” are so very narrow-minded they can only accept what comes, if that outside box lies “within their own small networks”.

Thank you, Martin Wolf

And on July 12 2012 Wolf also wrote that when "setting bank equity requirements, it is essential to recognise that so-called “risk-weighted” assets can and will be gamed by both banks and regulators. As Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk."

And that is something that I of course also appreciate, but that yet makes me curious on why Wolf does not follow up on it.

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Off-the-blog

One great perk I get from maintaining a blog like this is that it allows me to sustain many conversations with some great journalists who also need and wish to be kept “off-the-record” or as I call it “off-the-blog”.

Yet one wonders

Between January 2003 and September 2006, out of 138 letters to the editor that I sent to the Financial Times before I placed them on this blog they published these 15. Not bad! Thank you FT!

Unfortunately, since then and until the very last day of the decade, out of some 1.000 letters that you can find here, FT published none, zero, zilch. Of course FT is under no obligation whatsoever to publish any of my letters and of course one should not exclude the possibilities that my letters might have quite dramatically gone from bad to worse… yet one wonders.

My usual suspects are:

1. Someone in FT with a delicate ego feels his or her importance diminished by giving voice to a lowly non PhD from a developing country daring to opine on many issues of developed countries.

2. That FT has some sort of conflict of interest with the credit rating agencies that makes it hard for them to give too much relevance to someone who considers they have been given too much powers.

3. The FT establishment had perhaps decided there were only macro economic problems and not any financial regulation problems, and wanted to hear no monothematic contradictions on that.

4. That FT feels slightly embarrassed when someone repeatedly asks the emperor-is-naked type question of what is the purpose of the banks and realizing this was something FT should have itself asked a long time ago.

5. It is way too much oversight for FT to handle.

6. Or am I just supposed to be a living example of one half of the Financial Times motto, namely that of "without favour"Which one do you believe is closest to the truth?

A Blog is born

I like reading The Financial Times, or FT as it is known, and I frequently write letters to the editor and some of them that have indeed been kindly published, for which I feel thankful. But then I realized that all those letters to the editor that for reasons impossible for me to comprehend were never published, were condemned to an eternal silence not of their own fault, and so I decided to, at a marginal cost of zero, to resurrect them and keep them alive, right here.

English is not my mother language so bear with me and you’ll probably note when my letter has been published in FT by its correctness. Swedish is my mother language but I have not written anything serious in it for about 40 years and last time I tried, they just laughed their hearts out because of my démodés. Polish is my father language but, unfortunately, I do not speak a word of Polish, much less write it. Yes Spanish is my language, as I am from Venezuela and although I trust I write in it with great flair, I would still never dream of publishing an article in Spanish without having it edited by my wife.

And so friends here is my Tea with FT blog with my old and new letters to the editor. I hope you will share them with me now and again, and then again and again.

Welcome, and cheers, as I believe they say over there.

Per

PS. Just so that FT does not get too cocky and believe it is my only window to the world, I will now and again publish a letter sent to the editor of another publication.